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Canadian electricity provider Alectra Utilities is living a distributed energy reality most U.S. utilities can only dream of.

Formed early this year through the merger of four municipal utilities outside of Toronto, Alectra is now the second-largest municipal utility in North America behind the Los Angeles Department of Water and Power.

Building off the experience of its formative utilities, the company already has a large virtual power plant project for residential customers, is pushing into the commercial and industrial space and is also exploring utility-scale microgrids for critical infrastructure. And like any good utility, Alectra is exploring ways to earn a regulated rate of return on these investments.

In his keynote address at the Energy Storage North America conference last month, CEO Brian Bentz said his company is moving aggressively into the distributed energy space due to a sea change in grid operations brought on by DER advances.

“The traditional hierarchical grid structure was all about power flowing downward, communication flowing downward and commerce flowing downward,” he said. “As we emerge to the new energy environment, we're going to see the emergence of the democratization of energy, consumer empowerment and transactions at the grassroots level [that will] fundamentally change the way we deliver power.”

Those changes aim right at the heart of the regulated utility business model, Bentz told Utility Dive in an interview after his speech — prompting Alectra to rethink its approach. If utilities do not begin to offer distributed technologies on their own terms, consumers can find alternatives to their default utility service for the first time.

“Someone's going to cannibalize our business — it may as well be us. Someone's going to eat our lunch. They're lining up to do it,” Bentz said. “I think repositioning, redefining the grid from what it is as sort of a passive purveyor of energy to one that is an enabler of transactive energy at the grassroots level is a much more sustainable, profitable strategy.”

Alectra’s DER plays

Since its formation, Alectra has embraced an “all of the above” approach to DERs, Bentz said, looking to provide energy solutions to every customer segment.

In July, the utility formed a partnership with power developer AMP to provide microgrid solutions for commercial and industrial customers in Ontario. The primary aim is to help large customers avoid Global Adjustment (GA) charges — demand charges for five coincident peaks determined by the Ontario Independent Electric System Operator (IESO).

“The microgrid AMP partnership is more of a sustainability, reliability, ride through, cost reduction [play], when we approach commercial customers and say, ‘I can help you run your business better,’” Bentz said. “Ultimately, the first generation microgrid for us is GA avoidance … and hitting those five peaks so that your share of the GA pie is that much smaller. There is a strong business case there.”

The AMP partnership is innovative, but not novel in itself. Other North American utilities are also pushing into the C&I space with DERs — most notably Southern Co. with its acquisition of PowerSecure in 2016.

Alectra’s residential offering, however, could stretch the utility business model further.

Alectra’s Power.House virtual power plant pilot aims to outfit residential customers with intelligent solar-plus-storage systems capable of providing backup power and rate arbitrage opportunities for customers, while also deferring distribution system investments and providing grid services for the utility.

The program was launched in 2015 by PowerStream, one of the utilities that was folded into Alectra. Bentz said interest in the DER solution came from the IESO’s desire to not site new transmission lines and gas generation near Toronto.

“That was the solution that they went with ten years ago … They were looking to put in a transmission loop, and it had very vocal community reaction,” Bentz said. “They did not do the transmission loop, but they put a 150 MW [combined cycle gas plant] and hung it off one of the 230KV lines. They're saying, ‘We don't want to go there again. Give us the solution.’”

The pilot began with just 20 homes, but a feasibility study completed in April of this year endorsed its expansion to up to 30,000 homes to defer investments in other grid infrastructure.

“The conclusion was that this technology — solar-storage with intelligence — can in fact supplant a peaker plant,” Bentz said.

The company’s release on the study said that under the right conditions, the expanded virtual power plant could “result in the potential to defer energy infrastructure investments by at least two years in the late 2020s, while offering customers a significant reduction on their bills by generating their own energy, sending the surplus back to the grid for additional credit and providing a number of grid reliability services.”

Alectra is now in discussions with the IESO over expanding the Power.House program. A final decision could come with the release of the grid operator’s Long Term Energy Plan, which is expected in the coming weeks. Bentz hopes that the grid operator will approve rate recovery for the investment, “but if not, we’ll still do it.”

New business, new regulatory models

In the U.S., utility forays into the distributed energy space are often greeted with skepticism — if not outright animosity — by DER providers who fear the utility will use its monopoly power to box them out of the market.

Bentz said Alectra’s plans have been met with similar opposition in Ontario, creating a dilemma for regulators.

“There's definitely skepticism from other stakeholders and vendors. Other service providers are actively advocating to say this should be a competitive service, and it should remain a competitive service,” he said. “The problem is, you're trying to fit an old regulatory paradigm into a new reality, and it doesn't fit … We don't know where competition ends and monopoly begins, so how do you regulate in that environment?”

"We don't know where competition ends and monopoly begins, so how do you regulate in that environment?"

Brian Bentz

CEO, Alectra Utilities

Far from stealing the DER market from competitive providers, Bentz said his aim with rate-basing DERs is to eliminate financial disincentives for utilities to choose distributed solutions over traditional infrastructure.

“As a utility, I should be agnostic between a behind-the-meter, sustainable, customer-empowering solution as I am with a poles and wires,” he said. “In fact, I should probably favor the former more than the latter because it does empower consumers and it's more sustainable, assuming economics are relatively close.”

One way for regulators to parse the issue, Bentz said, could be to identify which DER investments benefit the grid as a whole versus which are primarily a play for individual customers. Where there’s a significant grid benefit, regulators should consider allowing rate-based investments under the same logic as they would for a transformer or substation.

“The purpose of these investments matters as to whether you're going to rate base them or not,” he said. “If it is sort of replacing or supplanting a grid-based solution, then yes, I think the case for rate basing [is stronger].”

“There's no easy answer,” Bentz added, “and rate setting is another difficult part of it, as you say, because who pays?”

As offerings evolve, Bentz said regulators could also explore compensating utilities for connecting customers with DER products.

"It's almost like a per-click, a Google-type approach. Every transaction — boom — you get [a cut] because the role of the utility goes from becoming a pipe for electricity as opposed to enabling commerce in a new world of energy ..."

Brian Bentz

CEO, Alectra Utilities

“Maybe because the future role of the utility is the enabler of transactive energy at the local level, they shouldn't be compensated only on terawatt-hour throughput. They should be compensated also on enabling transactions downstream,” he said. "It's almost like a per-click, a Google-type approach. Every transaction — boom — you get [a cut] because the role of the utility goes from becoming a pipe for electricity as opposed to enabling commerce in a new world of energy, so compensate them to enable commerce in a new world of energy.”

Those initiatives will require “fresh thinking” for the regulatory paradigm and undoubtedly face opposition from consumer advocates and private DER providers. But Bentz says Alectra will push forward regardless — business model transformation is vital to the utility's survival.

“This is really about a strategic positioning — an enterprise value optimization play — where I don't want to go all-in on traditional rate-based utility assets,” he said. “I think we need a diversified approach."